$70 Oil: The New Normal?

Posted by: Ben Levisohn on June 30, 2009

Few investments performed better than oil during 2009’s second quarter. Black gold is up 44% for the second quarter and has traded near $70 for the past four weeks.

But a consensus appears to have emerged that oil is overpriced and ready for a fall. The International Energy Agency released a report on June 29 showing weak demand. Furthermore, while fundamentals may be determining the direction of the price, speculation is responsible for oil’s enormous price swings. In its Perspectives Quarterly, Credit Agricole says that $70 is unsustainable. “Looking at fundamentals, however, the recent rebound in prices appears overdone,” the French bank says. It expects prices to return to $60 per barrel in the third quarter before increasing to $68 per barrel in the fourth quarter.

And the Wall Street Journal attacked the notion of $70 oil in two separate blogs, “$70 Oil, but Where’s the Demand?” and “Is the Oil Bubble Back?

British bank Barclays has a different take. In a new report, Commodity Refiner: Children of the Revolution, Barclays claims the fall in oil to below $40 a barrel was the aberration, and the recent rise in oil prices is a “return to normalcy.” Look no further than the price of December 2015 futures contracts, which have traded above $66.77 since September 2008, despite market turmoil and the complete collapse of spot oil to under $40 a barrel.

“Even at the lowest point for macroeconomic expectations, and for oil demand forecasts and sentiment, the idea that a sub-$70 per barrel price could be sustainable did not seemingly gain any significant traction,” the report says.

Barclays attributes oil’s renewed vigor to the fact that the world economy didn’t implode, an event that may have been priced into the market. (Sorry, no link.) It also says that the declines in oil production caused by the collapse in oil prices has yet to hit the economy. When it does, it will make up for the lack of demand cited by the IEA.

If Barclays is right, it’s time to stop assigning blame for $70 oil and learn to live with it.

Reader Comments

Strategery

June 30, 2009 7:21 PM

Well, before the commodity bubbles began in 2004, a normal price for oil was in the $20-$40 range. The FED has counterfeited many dollars since, so adjusted for inflation, $60-$70 oil might be reasonable.

Short term, there is nothing to justify $70 oil. Several MBPD day of production capacity has been taken offline. Demand is still weak and stockpiles are growing. The 'correction' at the end of last year did not last long enough and the price did not get low enough to compensate for the 2008 oil bubble (think about your wallet, a couple months of $1.50 gas did not make up for four years of $3+ gas and $4+ gas in 2008). I believe the current price reflects a bubble.

The oil bubble put many high mileage cars on the road, and that trend will not change. However, when (if) the economy gets going again, we may (or may not) encounter peak oil. It will be a rough ride.

Enrique

June 30, 2009 10:03 PM

At least for those fearing a deflationary pressure in the economy as Recession deepens, Oil is the only inflationary pressure which can turn the head of the consumer and make it react.

joe

June 30, 2009 10:07 PM

If Bernanke keeps printing money, I wouldn't be surprise to see oil back to more than $100 again. It's not the oil, it's the US dollar, s_t_u_p_i_d!

Mahagwa

July 1, 2009 11:43 AM

First of all, futures are NOT investments. Futures serve 2 purposes -- hedging and speculation ..period; you can not invest in something that becomes worthless after 3 months of existence.
True, the dollar has a major impact on the pricing of oil. However, the dollar has not changed significantly from when oil hit the $40 range and when it was above $100. What is driving oil prices is futures trading. Do a simple experiment, go back to the futures contracts that traded at $40 range and note the average daily volume, also not the avergae daily open interest volume; then compare that to when oil was at $70+. At the same time, note the value of the dollar during these two periods, as well as the value of the 10 year bond. You will likely conclude that the rise in the price of oil is due to speculation. Given that, and the fact that the September contract (Brent Crude) is at the $70 level and 3 months ago it was $30 less, this implies that gas at the pump should be priced to reflect a price of $45 crude, not $70. There is a major disconnect. The current $70 crude should be priced into gas in September. Hence we are paying September's prices at the pumps today..Gas should be less than $2 a gallon today. The refiners and gas companies need to be investigated. On a final note, it might make sense to trade oil in something other than dollars, that should reduce the price; however, that will also make it a lot harder to sell US debt.

G. L. Turner

July 1, 2009 11:38 PM

Mahagwa,

I thought I was listening to some of my onw discourse...exactly what I ahve been writign for 3 months...

Oil should be at $60, RBOB at $1.50...Government Sachs and US Big Oil are getting theirs"off the top" of the economic recovery, pushing it into jeopardy, jsut like they pushed us into the Global recession since 2005...thanks to their consorting with Bush/Cheney... who helped them position their greed machines into a chokehold posture...

Thanks Ya'll!

Saragih

July 9, 2009 4:54 AM

Somehow it is a good reason for oil price below $70. The 5 world largest economy need that to sustain the economic recovery. To keep the economy not to fast to heat.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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